What is the “Weinstein Clause”?

The disturbing revelations about Harvey Weinstein and other entertainment luminaries have put sexual harassment firmly on the agenda, emboldening victims to come forward to share experiences and pursue claims, leading to the rise of the #MeToo and #TimesUp movements internationally, and #NowAustralia locally.

The latest consequence of the Weinstein revelations and the #MeToo movement is the “Weinstein Clause”.

Bloomberg recently reported that such clauses, which relate to the behaviour of senior management of a company, are now regularly being included in business sale agreements.

In the sample clause cited by Bloomberg the vendor warrants that to the knowledge of the company no allegations of sexual harassment have been made against any officer or director of the company or any employee of the company who supervises a certain number of employees. The sample clause also contains a warranty that the company has not entered into any settlement agreement relating to allegations of sexual harassment or sexual misconduct by an employee, director or officer of the company.

The clause extends beyond the standard warranties relating to litigation or threatened litigation, reflecting the rise of “social due diligence”, which includes prospective purchasers making an assessment of the potential impact of sexual harassment or other behavioural misconduct claims against senior executives of the target company.

That risk is not merely hypothetical – allegations of misconduct against CBS CEO Leslie Moonves saw more than $1 billion wiped from the value of CBS and have seriously destabilised his leadership at the company.

Unsurprisingly the Weinstein Company was decimated by the Weinstein revelations – it declared bankruptcy in March 2018 and was then acquired in a fire sale by a Dallas-based equity firm Lantern Capital Partners. It is now known as Lantern Entertainment.

Could it come to Australia?

The impact of the Weinstein revelations and #MeToo have extended well beyond the United States and the entertainment and creative industries.

There is no reason why such clauses won’t start appearing in Australian deals, particularly where the value of the target business is strongly linked to its senior management, or creative or intellectual talent, leaving a purchaser susceptible not only to litigation costs and potential damages in the event of sexual harassment claims but also enormous reputational and brand damage which in some extreme cases could pose an existential threat to the business.

Such clauses are not a function of “political correctness” or “virtue signalling” but rather a hard-headed financial calculus, driven by the bankers and lawyers involved in such deals, which recognises the economic loss that can result from a company led by management whose conduct put it on the #MeToo radar.

Human resources professionals have long lamented that the contribution they make to a business can be undervalued as it’s not always readily quantifiable and is considered by some to be too nebulous to accurately assess. The evolution of “social due diligence”, which rightly treats culture and behaviour as a key factor in the transaction process, goes some way to address that.

This is a development well worth watching and, for companies looking to acquire other businesses, to seriously consider implementing as part of the due diligence and transaction process.

This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

This article first appeared on the SWAAB website and has been reproduced with permission.

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